Australia’s Corporate Law Firms Upbeat in Face of Slowing Economy

Corporate law firms in Australia are expecting another strong year, as mergers and acquisitions continue and companies keep investing in decarbonizing their operations.

In fact, many firms see opportunities in a possible economic downturn, with any slowdown in economic activity likely to lead to more commercial disputes, distressed asset sales and a resulting pickup in M&A activity.

Baker McKenzie has had a “very good” 12 months in Australia, driven by work in transactions, tax, technology, workplace design and the growing demand for advice on decarbonization and energy transition, said the firm’s Australia managing partner, Anthony Foley.

“In some respects, one of the biggest challenges we faced during the course of the year was being able to meet that demand in a pretty tight job market,” he said.

And finding staff, more than any looming economic slowdown, will continue to be the firm’s major challenge over the coming year.

“We would be expecting at this stage to enjoy similar levels of business in the coming year as we did in the last,” he said. “But it will be very dependent not just on those economic conditions, which in some respects we believe will generate demand for us in any event, but really dependent upon us ensuring that we have the lawyers and the teams available to get the work done.”

Foley expects the firm to remain busy across just about all transaction areas. The long-term trend toward decarbonization, an increased focus on environment, social and governance work, digital disruption and workforce design will continue to drive demand for lawyers, he said. And M&A will also remain busy. He is also expecting the firm’s restructuring and insolvency practice to be more in demand and so in April the firm added a partner from global firm King & Wood Mallesons.

At Australian corporate firm Clayton Utz, the restructuring team has been busy since the onset of the global pandemic in 2020 and the firm expects it to remain so, as higher interest rates push some businesses into distress, said managing partner Bruce Cooper.

Unlike previous cycles where companies might have ended up in insolvency, many are now being sold or their debt is being converted to equity, which will create work for the firm’s transactional teams.

“Those opportunities involve larger parts of the firm than the old days,” Cooper said.

A recent example of this new type of deal is the purchase of Virgin Australia by private equity giant Bain Capital in 2020 when COVID-related travel bans forced Australia’s No. 2 airline into administration. The deal generated work for Herbert Smith Freehills, Jones Day and Clayton Utz.

While Clayton Utz had a good year in the 12 months ending in June, Cooper said billings were off a little during the final quarter, as concerns grew over the possibility of a recession.

A couple of deals the firm was expecting have stalled and Cooper expects softness is a prelude to what the firm expects to see in the market in the next six months. M&A activity will pause while buyers and sellers find new levels for asset prices after the recent declines.

“I think it’s a bit of ‘suck it up and see’ for the time being,” he said.

Australia’s Treasury recently downgraded its forecasts for economic growth to 3% in 2022-23, then slowing to 2.5% the following year, driven in part by weaker consumption, reflecting higher inflation and higher interest rates.

As with other firms, Clayton Utz isn’t making any major changes to shore up for a possible recession, but it is taking some precautions, looking more closely at its costs and its use of lawyers.

In fact, the firm’s outlook is positive. Along with M&A and restructuring activity, the firm will remain busy advising and acting on decarbonization, energy and natural resources and tax controversy, particularly as the government looks to maximize the tax take from offshore taxpayers.

“There might be a little softness in the first half but I think we’ll come home strongly in the second half. So I’m going to go out a limb and say we’ll have a year about the same as this year as far as busyness goes,” Cooper said.

At Australian firm Corrs Chambers Westgarth, the head of corporate, Sandy Mak, said that after an incredible year for M&A practitioners, the market “fell over in a heap … and took a bit of a breather” at the finish of the Australian financial year, which ended on June 30.

But it looks as if the pause was only temporary. 

“It’s starting to feel anecdotally again really busy. There’s lots in the pipeline. There’s lots of pitching going on; a lot of activity. But the big question will be how much of it can convert into done deals,” she said.

And the market has changed. Whereas low-interest rates were a driver of M&A as investors sought better returns than could be had from cash or bonds, that is less of a factor as central banks have tightened rates, Mak said.

However, funds and private equity investors are still looking to deploy large amounts of cash, and this will drive the market, along with lower share prices for listed assets piquing funds’ interest.

“On the target side, we’re getting lots of boards getting their defense manuals ready. So they’re preparing themselves to mount defenses in the event they get unsolicited approaches,” she said.

Mak expects the tech, health care and infrastructure sectors to attract interest.

However, some strategic buyers, who purchase assets to add them to their own businesses,  might pause their M&A plans and consider whether they need to shore up their own operations in the event of a downturn.

Local firm Johnson Winter & Slattery had a record year in the last financial year. And it followed that with the firm’s strongest-ever month in July, off the back of continued M&A activity, particularly for renewable energy assets such as wind and solar generation.

The firm has tie-ups with specialist technology law firms on the West Coast of the U.S. and also with tech-focused U.S. private equity investors, and expects this source of work to remain strong. Managing partner Jeremy Davis is sufficiently confident that in-bound foreign M&A will continue that the firm has opened an office in the capital Canberra to help with foreign investment approvals.

“It’s a long-term investment and we think, much like you’ve seen in the U.S. with some of their foreign investment rules, [regulatory approval] has become a much more important piece of an M&A deal,” he said. “You really need some deep specialist skills and you need people who are dedicated to that type of work based in Canberra.”

Davis is also expecting an uptick in disputes work, driven in part by what he expects will be a relaxation of rules for litigation funders, which the previous government introduced to curb the rising number of class actions.

Global law firm Holman Fenwick Willan, which has a focus on contracts and disputes in the construction, shipping, minerals and commodities, and insurance sectors, is also expecting an increase in work arising from disputes as the economy slows.

“Not that we find joy in the fact you have volatility in economic circumstances, but the reality is that when markets are more volatile, that increases the requirement for our services in the firm really across all of our sectors,” said Australia managing partner Gavin Vallely. “You’ll find there are situations where people are looking at their contracts and looking for ways they can exit their contracts. That’s likely to create work for us.”

In May, the firm bolstered its disputes practice with the hire of Melbourne partner Bronwyn Lincoln and poached a four-strong disputes team from Quinn Emanuel Urquhart & Sullivan. It is currently looking for 10 more lawyers, although it is having trouble finding them in Australia’s tight market for lawyers, including those who specialize in insolvency and restructuring.

The shortage of lawyers has substantially pushed up solicitors’ salaries across firms, Vallely said. But even then it is not easy to dislodge partners from competitors.

“As a result of the uncertainty around economic forecasts, we’re probably moving back into a mindset where people are less inclined to move,” he said.